Tuesday, September 8, 2009

When Wall Street Almost Collapsed

We're now one year out from the biggest near-miss in Wall Street history. One year later, the pain persists for those of us who innocently watched our dreams and hopes for the future being snuffed out.

This week Fortune Magazine is taking its readers inside the minds of many of the pivotal players in that drama leading up to the forced bankruptcy of Lehman Brothers. The universal question was: Would panic prevail?

The fall of Lehman Brothers on Sept. 15, 2008, was the canary in the mineshaft for me. At that moment we were still working diligently on the premise that SwissRe, the organization committed to fund Legacy Now would survive. They gave assurances they had not invested in sub-prime mortgage paper, and were committed to the funding.

On December 1st, however, The Wall Street Journal published an article disclosing SwissRe's precarious financial condition and it imploded because of its off-balance sheet treatment of "credit default swaps" (CDSs), essentially insurance for companies invested in sub-prime paper. We had already watched the Royal Bank of Scotland fail, along with UBS because of their ingestion of sub-prime mortgage paper. SwissRe was to us a bright shining light of hope. However, they were compelled to fully disclose its involvement and not long afterward were nationalized by the Swiss government to save it. Overnight, SwissRe went from being the number one re-insurer in the world to number nine and Legacy Now died with it.

Then it was back to the securitization dance with RBS for one final spin around the floor with surviving players now two levels higher than our previous involvement with them. Hopeful signals were sent in the early part of this year persisting into May. RBS had also been nationalized to save it from collapse, but the Legacy Now project failed yet again not because of the soundness of the investment it posited but purely on arbitrary nationalistic issues -- the government-owned RBS simply didn't want to do business with America on CDOs of any stripe.

One year after that terrifying Monday in September, the people who struggled to cope with the financial crisis share what they were thinking as chaos broke out. Be sure to scroll through all the comments -- it's pretty chilling stuff.

Time Magazine this week is also suggesting a "top 25" list of people to blame for the current world financial crisis we face. Again, scroll through the list of Time's top 25. If you're in to needing to assign blame, there is plenty of fodder here to go around, and it will at least help you focus your anger and frustration if retribution is your wont.

Personally, marking this first anniversary is a painful reminder of how close we came to funding Legacy Now, and the bitter irony now looking back is that all the potential for good it might have offered seemingly died on that day a year ago. Hope persists, but it's on life support now.

A year later, the question remains: Is there a future for securitization of healthy, well-researched and actuarily-sound uncorrelated assets offering a safe and predictable investment return?

The silence is deafening.

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